A guide to tax on shares UK in 2019

How tax on shares works

Tax on shares can arise in a couple of ways. When you sell shares you have bought on the stock market it is possible you will make a profit. This is through selling them for a higher price than you paid. This profit is called a capital gain which can attract tax. The same principle also applies to funds. Depending on what you own you may also receive dividends from shares. Dividends can also attract tax.

It is important to understand what taxes you might need to pay and how they are calculated.

Buckle up as we are about to dive into the “exciting” world of tax.

Capital gains tax on shares

The tax you are liable for when selling shares and funds is called capital gains tax. It is important to note that capital gains tax only applies when you are selling the shares. The shares rising in value does not create a tax liability until you actually sell them.

The good news is that you only have to pay capital gains tax on profits made above a tax-free allowance. This is called the Capital Gains Tax Allowance. The current allowance is £12,000.

The rate of tax that applies depends on your tax band. Here are the tax bands for the current tax year (6 April 2019 to 5 April 2020).Check the government website for the latest tax bands.

Working out your capital gains tax

Let’s take a look at how your capital gains tax is calculated. This is based on the government guidelines.

Basic rate payer of Income Tax

First, work out your taxable income for the tax year (your income minus the personal allowance of £12,500). Write down this figure as we will need it again in a minute.

Then, calculate your total capital gains (what profit you have made from selling shares). This is how much you sell them for, minus how much you paid to buy them. You also deduct any transaction fees paid.

Add the amount calculated by completing steps 2 & 3 to the amount you wrote down for step 1.

Finally, look at where the figure you worked out in step 4 falls within the tax bands (above). If the figure falls within the Basic rate band you will need to pay 10% on your net taxable capital gains. Remember this is the figure worked out in step 3.

Higher and Additional rate payer of Income Tax

This one is a little simpler.

Calculate your total capital gains (what profit you have made from selling shares). This is how much you sell them for, minus how much you paid to buy them. You also deduct any transaction fees paid.

Now deduct the Capital Gains Tax Allowance (£12,000) from your total capital gains to get your net taxable capital gains.

How and when to pay capital gains tax

Currently, the deadline for paying capital gains tax owed is 31 January after the tax year the gain was made. For example, this would be 31 January 2021 for any gains made during the current tax year (6 April 2019 – 5 April 2020).

Dividends tax on shares

For the current tax year (6 April 2019 to 5 April 2020), the first £2000 of dividends received are tax-free. Any dividends received above this limit are liable for dividend tax. The rate of tax depends on your income tax band.

Complete a Self-Assessment tax return for dividends over £10,000. Register by 5 October following the tax year you received the dividend income.

Currently, if your total dividends are under £2000 HMRC say there is no need to tell them. Keep it and enjoy it.

Using a stocks and shares ISA to pay less tax on shares

There is a way to pay less tax on shares and funds. This is through using an ISA.

ISA stands for Individual Savings Account. You may have heard of a cash ISA which is a savings account offered by pretty much every bank. However, there is another type of ISA called a stocks and shares ISA.

A stocks and shares ISA is an investment account that you can hold shares and funds in. In the current tax year (6 April 2019 to 5 April 2020) you can invest up to £20,000 in a stocks and shares ISA.

When else you don’t pay tax on shares

Currently, government rules mean you do not need to pay capital gains tax on shares given as a gift to your husband, wife or civil partner. However, they may be liable to pay tax if they later sell the shares themselves. The gain is calculated using the value of the shares from when they first owned them.

Key takeaway

When you receive income from shares (or funds) you may have to pay tax. Capital gains tax applies to profits made above the annual allowance from selling shares. Dividends tax applies to any income received from dividends over the annual allowance. You do not need to pay tax on shares and funds held in a stocks and shares ISA.

All our content is provided for educational purposes only, to help you make your own decisions. We don’t provide personalised advice and therefore our content should not be considered an invitation, inducement or recommendation to engage in any particular investment activity. For professional personalised advice on tax consult an accountant or independent financial advisor. Please review our disclaimer and website terms for full details.

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